Financial Modeling
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Financial modeling is a necessary tool that allows companies to forecast their future financial performance. It is based on making assumptions about key factors like revenues, costs, growth rates, and debt levels. These assumptions are then integrated into financial statements like income statements and cash flows to analyze how changes might impact the company. Financial models are useful for planning, financing needs, analyzing major changes, and new ventures. Experts can create customized models for any industry that clients can interact with to test different scenarios and assumptions.
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Financial Modeling
- 5. Financial Modeling: What is it? Expected financial position
- 7. The annual budget becomes just that- annual! It is the main focus for 6 weeks, and then set aside until next year.
- 8. Is the Company in need of additional funds? The bank wants to see a realistic picture of WHY you need the money and HOW you are going to pay it back.
- 10. In order to financially analyze a company, it is necessary to UNDERSTAND the business and the industry in which it operates.
- 11. You must make assumptions such as:
- 12. After making these assumptions, it is vital to integrate them into a set of financial statements. This is the foundation for financial modeling: Making assumptions and putting them into a dynamic model that will allow you to assess the impact of those assumptions on a companyโs future financial performance.
- 15. ย
- 16. Analyze Relationships, Make Assumptions
- 17. ย
- 18. Project Revenues, Costs, Other
- 19. Develop complete financials and analysis
- 20. ย
- 21. ย
- 22. Run Scenarios, Change Assumptions
- 23. ย
- 24. Our model is client interactive: we can change any assumption and you can quickly see the immediate and long-term effects of this change. In fact, we have this meeting with the client during the preparation process, and sometimes include the bank.
- 25. It is a product that has been developed and improved over twenty years. Everything is driven by simple inputs, and it provides comprehensive and accurate information.
- 26. Good assumptions mean reliable results. We test and mathematically quantify our assumptions to be consistent with reality.
- 27. All industries!!! No two models are the same! Retail Service Assembly Packaging Manufacturing Medical Warehousing Logistics Restaurant
- 28. Our goal is to help the client truly understand their financial statements so they can make the best possible decisions for the business. We have the experience and unique ability to help guide the client in making assumptions. This knowledge ensures that the end result mirrors the reality of the expected business operations.
- 29. Thanks for your attention! Questions?
Editor's Notes
- West to Williams, east to Sandusky, south to Putnam, clients in FL and West Coast
- Greg and Aaron are Certified Fraud Examiners, (CFE) Greg is (FCPA) Forensic Certified Public Accountant, (CFF) Certified in Financial Forensics. Jack and Anne are Certified Valuation Analysts (CVA) Bill, Jennifer, and Tara are Certified Management Accountants (CMA)
- Financial modeling has always been a useful tool when trying to โpredictโ if you will where a company might be in 3 weeks, 6 months, a year, or longer. The longer the horizon, typically, the less statistically sound the assumptions. Most businesses have many moving parts, and trying to foresee each of the parts and how they fit together over an extended time period typically results in inaccuracies. We have learned through years of experience that the only way these models can be built is if you understand your clientโs business.
- Is a financial model a forecast or a projection? It can be either. It is prepared for whatever you need it to be. The difference between a forecast and a projection (though the terms are often used interchangeably) is that a forecast is based on assumptions reflecting the conditions the business expects to exist and the course of action reasonably expected to be followed. A projection, however, is prepared to present one or more hypothetical courses of action that the business might follow. An example might be one that we recently prepared for a manufacturer. They are getting ready to launch one new product line. Late 2009 was spent gearing up- purchasing tooling, equipment, some research and development, and developing prototypes. The item is expected to start selling in march, 2010. Our forecast took into account all of the expected new revenues, costs, and inventory cycles for the expected business. However, this same manufacturer is looking to start another product, but it is very uncertain as to if or when, as well as what the reasonable income stream might be from this item. Once we add this latter data in, the model now becomes a projection, because all of the data included is based on assumptions that may or may not occur.
- Our clients request the model for many reasons: The bank needs it, weโre struggling with cash flow, how much money will we make now that we lost this customer and the list goes on. What is the biggest question the bank has? HOW MUCH MONEY DOES THE BUSINESS REALLY NEED FROM US?
- Our clients request the model for many reasons: The bank needs it, weโre struggling with cash flow, how much money will we make now that we lost this customer and the list goes on. What is the biggest question the bank has? HOW MUCH MONEY DOES THE BUSINESS REALLY NEED FROM US?
- As a summary of will it answer the right questions, I will say that we have done it for numerous applications and it always provides the information that is needed.
- To prepare an accurate model, you must know the business. That may sound like a difficult task for a new client, but it is really not. Most owners and management teams are eager to share their information with you. It is our job to utilize that information to supplement the financial analysis that we do.
- The Overall Model consists of five major phases.
- phases- First you have to gather the clientโs historical financial information- balance sheets, income statements, cash flows, borrowing base. A minimum of one year by month is a good starting point. If you can get more than one year, that only increases the validity of the analysis.
- Once you receive the historical information, the fun begins. We have a variety of statistical methods to determine if and what types of relationships exist when dealing with cash cycles, inventory, profit and cost items. We utilize the results of that analysis, along with the knowledge we have of the client to begin to make assumptions to forecast the future.
- As part of our analysis we always find it useful to chart the resulting data. In this particular instance we were trying to identify a relationship between the change in inventory with the projected sales. This is a multifaceted analysis that we utilized to try to predict some trends. We also find it useful to prepare charts to prove the validity of our assumptions.
- The resulting data, along with the clientโs specific input is used to put together a first draft.
- The draft includes a complete set of financials and charts.
- The reports include monthly balance sheets, profit and loss statements, statements of cash flows, analysis of accounts receivable and accounts payable cycles
- Supplementary expense information , existing and anticipated debt service, borrowing base calculations, covenant calculations, and there are client specific reports as well.
- At this point we pull the client in to view it onscreen to analyze it with their knowledge of the business. It may seem unrealistic, but we often provide them with information they never knew about their own business!
- Hopefully, any firm can input historical information and predict what next year might bring by looking at the prior year. WE know that a financial model is so much more than that- I have identified at each step the actions we take to ensure that we have covered every material detail of the clientโs business, and the numbers behind it.